Secured Cards Offer an Alternative to Regular Credit Cards
If your credit report and score aren’t quite good enough to qualify for a credit card, you may be eligible for a secured card that can be used at the same locations that accept regular credit cards. A secured credit card is co-branded with Discover, American Express, Visa, or Mastercard, and has all of the same convenient features that a regular card has. One difference is that secured cards are more expensive to use (after all, you are a higher credit risk for the bank), but this option may be worth it if you need the plastic.
Most secured cards report payment histories to the three major bureaus; and this will help you to build a credit history. In order to improve your credit score, you’ll need to make your monthly payment on time and stay within your credit limit, which is typically pretty low on a secured card.
USAA offers a secured card with American Express. It comes with a $35 annual fee and an above-average interest rate. Despite being a secured card, it charges no fees for foreign transactions, which is actually a better policy than many regular credit cards have.
The USAA secured card requires a 2-year certificate of deposit that backstops the credit line. For example, if you deposit $1,000 in the CD, your line of credit will be $1,000. The minimum deposit amount is $250, while the maximum is $5,000. While your money is on hold with the bank, you’ll earn interest on it. If you need a credit line increase later on, you can simply deposit more funds into the CD, up to the maximum.
An example of a secured Mastercard can be found at Capital One. This one carries no annual fee, although it has a very high APR. Like USAA, Capital One reports payment history on this card to the major bureaus, so proper use of the card can improve your report and score over time.
Capital One determines a secured card’s credit limit differently than USAA. Instead of opening a CD, you make a security deposit of $200, and Capital One assigns a credit line of $49, $99, or $200, depending on your creditworthiness. The bank will raise this spending level if you make the first five monthly payments on time. No additional deposit is needed with this policy.
Up next is the Discover it® secured card. This one actually has a rewards program, a rarity among secured cards. You earn 2% cash back at restaurants and gas stations. Transactions at other retailers will garner 1%. There is a maximum of $1,000 in purchases that earn cash back.
Discover’s secured card carries no annual fee, although the bank imposes a very high interest rate for balances that aren’t paid off each statement cycle. A security deposit of $200 or more is required to qualify for the card. After eight months, Discover will review your history and consider converting the card to a regular credit card.
Last, but not necessarily least, in our survey is a Visa secured card from Green Dot. Called the primor card, it comes with a $39 annual fee and a decent APR. One unpleasant charge this card imposes is a $49 fee for a credit line increase.
An FDIC-insured savings account is required to open the Green Dot Visa. The deposit amount determines the card’s credit limit. There is a $200 minimum and a $5,000 maximum. As with the other cards, Green Dot reports the card’s history to the major credit bureaus.
Depending on your specific goals and circumstances, any one of these four cards could be the better choice. If you don’t need a high credit limit and don’t plan to carry a balance, the secured card from Capital One would be a good bet. If you think you’ll carry a balance, the Green Dot card with its low APR would be a better choice. The USAA card would be the best pick if you expect to make transactions in a foreign currency; and the Discover it secured card would be the wisest option if you want your card to convert to a regular credit card as quickly as possible.